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Housing: Where's the Plan?
By Kate Barker London Publishing Partnership
Copyright © 2014 Kate Barker
All rights reserved.
ISBN: 978-1-907994-41-8
CHAPTER 1
What outcomes do we want?
Since the financial crisis of 2007–9, discussion of a 'housing crisis' has been growing and a range of policy responses have been put forward. For example, the mortgage guarantee scheme introduced in late 2013 as the second part of 'Help to Buy' was intended to help kick-start sluggish housing transactions, while the so-called bedroom tax introduced in April 2013 reduced housing benefit for those with spare bedrooms in an effort to cut the growing housing benefit bill. By mid 2014, the primary concern was the overheating market in London and its hinterland. But these policy responses and debates don't effectively tackle the big underlying issues that have emerged over recent decades, including a widening gulf in wealth between those in owner-occupation and those out of it, and the resulting concerns about inequality between generations.
Governments are rarely precise in how they measure their success with regard to the housing market. In 2007, the Labour government summed up its aspirations as follows:
We want everyone to have access to a decent home at a price they can afford, in a place where they want to live and work.
It would be possible to measure the success of the first part of this goal, but the second part may not even be feasible.
The housing goals of the 2010 coalition government, as stated on the website of the Department for Communities and Local Government, have varied. The 2013 version included 'helping more people to buy a home', which might imply that one criterion for success would be a higher rate of owner-occupation. This has been an implicit or explicit policy goal for governments of all persuasions since the 1970s. But many other goals are pursued by governments, including managing house price inflation if it signals an unsustainable boom, or not building on green belt or environmentally sensitive land. Achieving success in terms of any of these aims requires (among other things) some myth busting.
Is more home ownership desirable?
Long-term policy support for home ownership has been quite successful. The share of owner-occupation in England rose pretty steadily between 1961, when it stood at 44%, and 1991, when it reached 68%. That level changed little until the financial crisis. So, while in 2001 the share of owner-occupied households reached 70%, after 2007 that share fell, to 64% by 2012. Table 1.1 indicates that the rise in owner-occupation in the 1960s and 1970s reflected a move out of the private rented sector, whereas in the 1980s and 1990s it was the share of social housing that fell. The post-crisis fall in owner-occupation has been offset by a move back into the private rented sector: its share has risen from around 10% in the early 2000s to over 18% in 2012.
It is argued that a high level of home ownership leads to better care of the housing stock, and more commitment by households to their community. While this might be true, homeowners also tend to be better off and better educated, which might contribute to these behavioural effects. There is not enough evidence to disparage tenants' public spiritedness. But housing tenure can have social consequence. In the US context, Anne Shlay has commented that home ownership is
not simply an indicator of social inequality; it is a causal mechanism underlying inequality. Also important is housing tenure's role as a basis for solidifying divisions and antipathies among different social groups.
There are also economic arguments against too high a rate of home ownership. The most important is that a high rate of home ownership tends to reduce labour mobility, and so makes it more difficult for adjustment to take place following economic shocks, such as a recession. Young people may find it harder to leave home to look for work if there is a thin or expensive rental market. The scale of these effects is uncertain, however, and it is obviously not solely home ownership that makes people reluctant to move but also attachment to an area or family ties.
Another important consideration is that a high rate of owner-occupation increases opposition to new residential building, because this is perceived to reduce the value of existing homes. For many households, the home is the largest single investment, so it is not surprising that new development proposals arouse strong emotions.
If neither social nor economic arguments for a high rate of home ownership are compelling, why does this tenure so often receive special treatment? The obvious answer is that in the UK it remains the long-term aspiration of the majority. The Council of Mortgage Lenders has drawn together a sequence of surveys (conducted since the mid 1980s) that suggest that around 80% of households would prefer to be homeowners within a decade. There was only a slight decline in this proportion after the financial crisis, despite the initial fall in house prices. Governments want to be seen to support this aspiration but they are hampered in their ability to do so by the paradox that while it is easier for first-time buyers if house prices are lower, falling house prices are obviously unpopular with the majority who already own a home. So governments resort to measures to subsidize ownership. These help some people but fail to tackle the underlying problems in the housing market, and they can therefore have an adverse impact on other households by pushing prices higher.
Building more homes is often an unattractive option for politicians, especially at local level. The benefits of boosting supply only become apparent after a number of years but voters voice strong local opposition to building on specific sites today. Governments can most effectively rise to this challenge if they convey clear messages about why increased housing supply matters, and about the potential riskiness of home ownership. It is not for governments to prescribe the tenure mix we 'ought' to live in, and it's actually a bit odd that governments support our preference for home ownership: many households will have other economic aspirations too (owning a luxury car, for example), but we don't expect government policy to subsidize these.
Affordability
It is often asserted that housing is becoming 'unaffordable', usually on the basis of house prices relative to earnings. But care has to be taken when interpreting the facts here (see Figure 1.1). Dual-earner households can clearly afford more in mortgage payments, and interest rates have fallen, which makes the initial mortgage costs more affordable than they were in the 1970s or 1980s. Interest rates have fallen along with wage and price inflation, so the real cost of the capital repayment of a mortgage has tended to rise. Lower interest rates and more dual-income households have not fully offset the rise in prices, which has resulted in a rise over time in the age of first-time buyers. Loan-to-income ratios for first-time buyers have been on a long-term upward trend. It is these long-term considerations that suggest a persistent failure of supply to keep pace with demand, although the underlying trends are not easy to separate from short-run volatility driven by changes in the price or availability of credit.
In addition, the upward trend in house prices relative to incomes, which has persisted for the past forty years, has resulted in a changed picture of wealth inequality. One effect has been to spread wealth further down the income distribution, which might be considered a good thing. But it has become harder for people who cannot become homeowners to accumulate wealth.
The role of the private rented sector
Since the financial crisis, the private rented sector has come to play a larger role in the housing market, with more people having to opt for renting, rather than borrowing to buy a home. Two potentially incompatible policies have been proposed in response.
The first is to encourage the building of new private rented capacity to meet growing demand, as new supply from 'speculative' homebuilders collapsed after the financial crisis. In 2012, the Montague Review proposed measures to encourage institutional investment in private rental. The government responded by offering finance for suitable proposals, which took some of the risk away from investors, and it also guaranteed debt used to fund new private rented sector schemes.
These measures should help, but institutional investors may still need to see capital appreciation because net rents (rents after management costs are subtracted) in the first decade of the 2000s produced a yield of only 3.5%. Buy-to-let landlords with only a few properties tend to undervalue their management time, giving them an apparently better yield and enabling them to undercut institutional investors. Increased institutional investment in rental housing might therefore only be financially viable if potential landlords can acquire properties at slightly below-market prices.
This could be achieved by local authorities designating some land specifically for private rental building – annoying the landowner, who would then receive a slightly lower price because of the planning restriction – or reducing the affordable housing requirement and other planning obligations for private rented sector sites. In return, investors could be required to keep dwellings as rental properties for a specified number of years, with the added benefit that this would offer greater security of tenure to the tenant. But this raises some risks. In particular, if the private rented sector has expanded mainly because of mortgage market constraints, it is reasonable to expect the demand for rented accommodation to decline as the mortgage market recovers. If private rented units cannot be sold to prospective owner-occupiers, there would then be a risk of voids (periods of vacancy between tenants).
The second policy response has been to try to limit rent rises, which have been a major contributor to pushing up the housing benefit bill. Steps have been taken to control rents, at least for housing benefit tenants, by reducing the level of rent eligible to be counted for housing benefit to those of the cheapest 30% in any area: an attempt to prevent landlords gaming the housing benefit system by raising rents. While this might help to keep rents down for these tenants (although it is likely to mean that benefit claimants will increasingly only be able to access the least desirable housing), there is little evidence of any effect on other rents, so wider rent controls are frequently suggested. But rent controls, unless they are very carefully formulated, will choke off the desired increase in the supply of private rental property. Elsewhere in the EU, controls have not stifled supply, but this is because the controls often fail to keep rents much below market levels. A concerted resort to rent control, then, would simply be an attempt to fight the market by reducing the price of something that other policies have rendered in short supply. It is unlikely to succeed. Changes to encourage longer secure tenancies, or to control rent increases, might achieve a better balance between protecting tenants and retaining an adequate incentive for landlords.
It is also unfortunate that better data on rents in the UK is not available. The Office for National Statistics has introduced a recently developed rental series into a new measure of inflation, but at the time of writing this series was being reviewed. Rental data is important for measuring inflation, and for indicating the trend in housing affordability.
Homes where people want to live
At any time different towns and regions will experience very different housing pressures. During the recovery from the financial crisis, London's international status has driven up house prices there. But cities such as Stoke-on-Trent, where the housing market was still being regenerated in the late 2000s, have seen a far slower return to upward price pressure.
Spatial policy has recently moved backwards. In 2010, the coalition government ended regional planning, choosing instead to focus on local planning (through 'local enterprise partnerships'), making it difficult to develop a coherent approach to regional spatial questions. This is a pity both from a development point of view and from an environmental one. Issues of water scarcity, or of biodiversity, are often best considered over quite wide geographical areas, and these debates cannot now easily take place.
Summary
All governments surely want to see the population decently housed, and yet major housing issues are still not being tackled in a systematic way. Politicians find it hard to resist introducing short-term policies that seem to support the popular desire for home ownership, directing subsidy towards those who are nearly able to afford to buy a house, but this is not the best use of taxpayers' money in the housing market.
Economists tend to prefer policies that level the playing field between home ownership and renting, but they are not easy to implement. Policy towards the private rented sector is itself confused: it aims to limit rent rises and to encourage more investment, but these are conflicting aims.
The fundamental issue is that a house is inevitably both an investment asset and a provider of housing services. If declining supply relative to demand is likely to result in a long-term trend of rising prices, it will be a major incentive for buying a home.
The UK has experienced a long-run undersupply of housing relative to demand, which rises because of higher incomes and a growing population. (Demand is not the same as 'need': the latter would imply we all lived in houses that just met government-determined space and bedroom allowances.) The recent financial crisis has been followed by a sharp fall in supply, but the shake-out of smaller developers and the loss of construction skills means that just getting back to the level of new housing supply delivered in the mid 2000s may take several more years.
On top of this, foreign buying is distorting the market in key cities (especially London), the tax system could be better structured to encourage housing supply, and there is a basic question as to how much housing is compatible with environmental concerns: both for the UK as a whole and for particular areas.
All these complex and interrelated questions need to be viewed through a clearer policy lens. The rest of this book seeks to do just that, focusing chiefly on private housing. Social housing deserves its own book.
CHAPTER 2
Post-war planning and housing policy
Successive governments have wanted to ensure that all households have a dwelling of a decent standard and, through good planning, that these homes are in pleasant places. Unfortunately, the objectives of those devising and implementing planning regulations have not always been the same as the objectives of those concerned about housing market outcomes, and this has often resulted in frustration between different arms of government at both national and local levels.
This is not the story of planning in the UK as a whole: policies in Scotland and Northern Ireland (and in Wales since 1998) have increasingly diverged from those in England as a result of devolution. This means that much of the following discussion is about England (although some of the quoted figures are UK-wide ones). Devolving planning complicates policy, since some measures (particularly taxes) have remained national and can rub up against the devolved administrations' housing and planning policies.
A little history helps in understanding today's housing situation, so I give a brief description below of the key planning acts and other regulations, the major changes in the taxation of development and housing, and the shifts in policy towards social and other 'affordable' housing. By detailing some of the relevant history, I give examples of how successive policies have often had unintended consequences because of a failure to anticipate how the market would respond and/or because the impact of economic and credit cycles has been ignored.
The 1950s and 1960s: post-war reconstruction
The most important year in our planning history is 1947, when the Town and Country Planning Act effectively nationalized development rights in England and Wales. From that time on, most developments of any size have required an application for planning permission. This Act also introduced the plan-led system, meaning that decisions on planning applications needed to be made in accordance with the local plan unless there were specific reasons not to do so (these are called material considerations, an example being a shortage of school places). Despite many modifications, in principle these two key features still hold sway in England.
(Continues...)
Excerpted from Housing: Where's the Plan? by Kate Barker. Copyright © 2014 Kate Barker. Excerpted by permission of London Publishing Partnership.
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